Open Source Business Models

Commercial use of open source

For
a commercial company, Open Source Software is software that is licensed
to that company under an open source license. The commercial company
may make use of the open source, like usage or redistribution of the
open source free of charge, but it also has to fulfill the obligations,
like delivering a copy of the license text with the software. So the rights and obligations have to be analyzed diligently to make sure there is no violation of the license terms.

Suppliers of open source software

Open
Source software can be supplied by a community or by a commercial
company. We speak of community open source and commercial open source
respectively.

For community open source, a community of people
provides creation, maintenance and support for an open source software.
In most of the cases the community provides these services free of
charge.

There are, of course, differences between a company and the
open source community. These differences are important to understand,
because they influence a customer´s supplier decision and they also
create niches for companies to establish a business in that niche. The
differences are listed in the following table:

Commercial open source vs. community open source

So
a customer might decide for commercial open source if he needs
customized license terms, runs open source in a mission-critical
environment and thus needs service level agreements in support or if he
needs maintenance provided in a different way than via the open source
community.

In many business contexts it makes also sense to have
liability and warranty provisions from a supplier when using open
source. In most of the existing open source licenses there is exclusion
of any warranty or liability (3). This is another reason why companies
might choose commercial open source over community open source.

Classification of open source business models

Based on a classification of business models (Weill et al.) we will have a look at open source business models.

Open
source usually is free of charge, but that does not necessarily mean
there is no compensation for using the open source component.The
next figure shows a classification of generic business models. The
business models relevant for commercial open source business are marked
in bold. In this general classification of business models, software
classifies as an intangible product, see the corresponding column
“Intangible”. Software can be created or written (“Inventor”),
distributed (“IP Distributor”) or licensed or rented to customers (“IP
Lessor”). In addition, the customer needs services to run and maintain
the software, like implementation, support and maintenance services.
These classify as “Contractor” business. We assume here that all open
source businesses make use of at least a subset of these four business
models.

No
matter if it is a community or a commercial software vendor, one or
many of these business models are applied. By choosing a specific
selection of business models, so-called hybrid business models are
created. Creating hybrid business models means combining different
business models with their specific goals, requirements and cost
structures.

Since these business models are models on a type level,
there might be different implementations of how a certain business models are run. An open source community might run the Inventor business for
creating software in a different way (leveraging the community) than a
commercial software vendor (leveraging a development team), from a
process as well as from a resource perspective. But on a type level,
both run the same type of business called Inventor.

So going forward,
we will analyze commercial and community open source business models as
a selection of a subset of the business models identified here:
Inventor, IP Lessor, IP distributor and Contractor.

Community open source business model

The open source community business model usually makes use of the following business models: Inventor, IP Lessor and Contractor.

For
the community, the Inventor business is what the community is most
involved in. It is about creating open source software and engaging with
the community members to coordinate the work and collect the
contributions of the community members.

The IP Lessor business is
also important for the community. The IP lessor business defines the
terms and conditions of the open source license and makes the software
available to customers. The license is defined by the community and all
customers using the software have to comply with it. In some cases,
there are multiple different licenses for an open source software that a
customer can choose from.

The
Contractor business contains all human services to customers. The
community typically provides these via email and they contain services
like maintenance, support, translation for country specific versions and
the like. They are all carried out by community members. In almost
every case, the customer does not pay for these services, but the
customer has no rights to enforce any of these services and he does not
have service level agreements, like a definition of minimum answer time
for support incidents.The community can serve two types of
customers: software vendors and (end) customers. For software vendors,
the open source community works as a supplier of software, for the
customer, the open source community works as a software vendor licensing
software to the customer. These two relationships differ in the way
that customers and software vendors might make use of the software.
Customers usually license the software for internal use only. Software
vendors license software for internal use and/or for distribution to
customers. Often open source software is included in commercial software
and provided to customers by the software vendor. In this case, the
software vendor has to make sure he complies with all licenses of all
open source software he is including in his software product.

Commercial open source business models overview

In
the last section we described the community business model, now we turn
to the commercial open source business model. Figure 4 shows the
typical business models implemented by commercial software vendors. As
mentioned before, a commercial software vendor does not have to
implement all of these business models, but can rather build unique
business models by selecting a subset of available business models. One
basic difference to community open source is that the IP Distributor
business model is an option for commercial companies.The history of
commercial open source companies shows that in the beginning the
companies focused on services around open source software, which matches
the Contractor business.

The
next step was to build distributions for open source software, like
e.g. for Linux. This matches to the IP Distributor business model.

Today,
we find all kinds of hybrid business models around open source.
Companies are building software and donate it, completely or partially
to the open source community (Inventor business model). Commercial
software vendors often package or change or extend existing community
open source software, so the community acts as a supplier of open source
software to the software vendor. In some cases the software vendor does
not use existing open source software from a community, but chooses to
offer its proprietary software under a dual licensing strategy, e.g.
under a commercial and an open source license.

Commercial services for open source

Since
open source licenses are free of charge, commercial companies first and
foremost focused on providing services around open source software. The
expectation was simply that customers would still need services and
since the license was free, that customers would have more money to
spend on services.

Commercial open source companies provide the
following services for open source software: Maintenance, Support,
Consulting and Extension or adaption of open source software to a
customer´s needs.

Maintenance services consist of the following
activities: building future versions, bug fixes and upgrades and
providing them to the customers.

Support services contain of accepting, maintaining and resolving incidents that the customer has while using the software.

Consulting
services mean planning and executing the installation and go-live of
customers´ system landscapes containing the software.

Extension or
adaption of open source software based on customer´s requests is
designing, programming, testing and delivering open source software that
has been modified or expanded. Examples for extensions and
modifications are:

Functional Extensions for open source applications with country-specific functionality or customer specific functionality;

Extending the usage scenarios for open source to additional countries by adding additional translations of user interfaces;

Adapting open source software means to make open source software run on customers´ hardware and software platforms.

Online Course on open source business models

Find more details in lecture 3 and lecture 6 of this exciting online course on open source business models:

Summary and outlook

The
evolution of open source and commercial open source business is still
underway. In the future we will see additional varieties of open source
business licenses, such as in open source hardware or designs, and new
open source business models, like in open source on demand applications
or open source software in cloud environments.